Question

The cigarette industry is subject to litigation for health hazards posed by its products. The industry has been in an ongoing process of negotiating a settlement of these claims with state and federal governments. As the CFO for Altria Group, the parent company of Philip Morris, one of the larger firms in the industry, what information would you report to investors in the annual report on the firm’s litigation risks? How would you assess whether the firm should record a liability for this risk, and if so, what approach would you use to assess the value of this liability? As a financial analyst following Philip Morris, what questions would you raise with the CEO over the firm’s litigation liability?